Pakistan has posts significant growth in LSM, but highly dependent on direct and indirect imports is a setback for many sectors
Interview with Mr Nasim Beg – CEO, Arif Habib Consultancy
PAGE: Tell me something about yourself and your career please:
Nasim Beg: I have around fifty years of experience of working across financial services, as well as the real economy. Over this time, I have also worked in the UAE and the UK. I started out my career path by qualifying as a Chartered Accountant in 1970.
PAGE: What is the current state of the economy of Pakistan?
Nasim Beg: In the recent months we have observed significant growth in Large Scale Manufacturing (LSM). In addition, we are looking increasingly good on the Current Account, especially on the back of home remittances, which have shown a remarkable growth resulting in improved foreign exchange reserves, which in turn has resulted in considerable strengthening of the Pakistan Rupee. The Stock Exchange, except for minor corrections, has been performing well.
In handling the lockdowns owing to Covid-19, some of the pro-poor measures taken by the government were good and timely. In addition, the measures taken by the State Bank were extremely helpful for business and industry. The Covid management of the first wave has been highly successful and recognized internationally; however, a word of caution and worry, as the second wave is now gaining strength and there are serious signs of isolation fatigue amongst people, as well as a degree of reduced recognition of fear this time around, which is leading to poor adoption of preventive SOPs by the public.
Also, while the LSM growth is very impressive, we must recognize the low base affect while looking at that the growth number.
Nevertheless, overall, the above indicators appear encouraging, though on the agricultural side, we have had the bad news of a significant shortfall in cotton production, which will result in having import increase. In addition, the supply side of wheat and sugar were not managed well, which led to inflationary pressures in food prices. This is obviously hurting the middle- and lower-income segment, which is the large bulk of our population.
Thus, in balance, it is too early to express, with confidence of conviction, on how the economy is doing currently, especially when the government has recently stated that its interaction with International Monetary Fund (IMF) is being revived, which clearly indicates that we need continuing help.
PAGE: Your views on current account and imports vis à vis the economic growth :
Nasim Beg: This aspect of the economy unfortunately, remains a cause of great concern in my opinion. I would ask your readers to look at the picture of our trade account post Bangladesh, the data before that is not properly comparable. We have had several governments, both duly elected ones and well as military dictatorships over the period. Since 1971, i.e., almost for fifty years, we have not had one single year when exports have exceeded imports. However, since we export manpower, we should include the home remittances as a form of exports; when we take the remittances into account, we have six years out of the fifty, where the net account was a surplus, and the current year is thus far in positive territory. The problem is that over the last several decades, we had created a taxation structure that made it attractive to import and trade, rather than to manufacture and sell. This was primarily the presumptive tax regime, which favored importers, and this was coupled with serious levels of smuggling and under-invoicing by importers, while the mindless donor driven free-trade policies made things worse. This has converted us into a highly import-dependent economy. We are celebrating the growth in LSM, with the auto sector, cement etc. showing what is being described as a hockey stick or V-shaped recovery. However, the problem of our import dependence is likely to hold us back going forward. Even if we look at low and medium cost housing, it is a net importer, as we use imported energy, i.e., coal and import-dependent electricity to produce cement. We use imported steel billets or scrap for the steel that is converted to construction material that goes into construction, while using import dependent energy as well; all the plumbing is based on imported metals, we import chemicals that go into paints.
Taking automobiles, it is a similar story, apart from importing major components such as engines and transmissions, all that we produce locally is dependent on imported flat steel, which we convert to components, or we produce components out of imported plastics raw materials and imported chemicals go into paints.
Take the case of pharmaceuticals, 98% of the basic chemicals that go into our pharmaceuticals are imported.
Add to this list, the import of cotton going into textiles, some of which will be exported but some will be consumed domestically; we need food items, petroleum and even the basic machine tools.
I am not too sure about sustainability and adequate growth of exports; we have had some luck with international demand for low value-added items and apparently, we are running full capacity. On the other hand, Bangladesh has had setbacks in its higher value-added items.
We have seen a good increase in remittances, which may be attributable to higher dependence on online and formal sector money transfers owing to Covid-19, but hopefully, this may become a permanent way of transferring funds. However, this can come under stress on account of low oil prices and their impact on the GCC economies.
We must keep in mind the fact that we have had to borrow new funds almost every year of our existence to meet the trade account gap and to service previous loans. This means that we have ever-increasing foreign debt service demands.
Unless we start seeing a clear visibility on the account of our ability to reverse the foreign exchange shortage, our growth will remain constrained, especially in view of our consumption driven economy being highly dependent on direct and indirect imports.
PAGE: Your views on the Financial Action Task Force (FATF) decisions on the economy:
Nasim Beg: There is no doubt that we have had a weak oversight over money transfers, both within the country, as well as outbound and inbound transfers. This has been attracting concern by the world community, which is particularly ceased with terrorist funding. We are also seeing increasing recognition amongst the world leaders that the West run offshore tax havens contribute to all sorts of transfers, not exclusively tax avoidance, but terror finance as well. Also, very importantly, the tax havens help transfer ill-gotten wealth from the poorer countries to the wealthier ones.
As regards FATF, we are on the grey list and under constant threat of being put on the blacklist. Given the fact that it is essentially a punitive action, should we be relegated, it is bound to have a negative impact. Pakistan has taken several measures to tighten money flows and have much better oversight. It is now perhaps better than many countries, which are not on the grey list. The international politics are at play as well. We need to be compliant and watchful, and in addition step up our diplomatic efforts to ensure that we come off the grey list, rather than being relegated to the blacklist.